Trade, Institutional Quality and Trade Agreements: How Does Nigeria's Macroeconomic Stability Respond?

Abstract

The macroeconomic health of an economy is reflected in its internal and external balances, which are critical for sustaining strong trade relations, economic growth, productivity, innovation and lasting stability. This study examines the interactive impact of institutional quality, global trade, and trade agreements on Nigeria’s macroeconomic stability from 1981 to 2024. Data were sourced from the World Development Indicators (WDI), Central Bank of Nigeria (CBN) Statistical Bulletin, United Nations Conference on Trade and Development (UNCTAD), and World Trade Organization (WTO) legal documents, including TRIPS, GATT, and the Doha Declaration. Drawing on institutional economics and international trade theory, the study employs the Autoregressive Distributed Lag (ARDL) model to assess both short-run dynamics and long-run relationships. Inflation is used as a proxy for internal balance, while the current account balance measures external balance. The results indicate that trade openness has a negative impact on both external and internal balances, contrary to expectations, while foreign direct investment (FDI) exerts a positive effect. Interaction terms reveal that strong institutional quality amplifies the benefits of FDI for macroeconomic stability but does not significantly moderate the effects of trade openness or WTO membership on inflation, highlighting Nigeria’s import dependence. In line with expectations, WTO trade agreements have a positive effect on the current account balance but a statistical negative insignificant impact on domestic price stability (inflation). Overall, the findings suggest that trade liberalization and agreements alone are insufficient to improve macroeconomic performance without complementary institutional reforms. The study recommends leveraging WTO engagement alongside domestic reforms, including expanding the Anchor Borrowers’ Programme, strengthening development finance institutions such as the Bank of Industry and Bank of Agriculture, stabilizing macroeconomic structures, and increasing investment in non-oil sectors and human capital to achieve sustainable internal and external balances in the context of global trade dynamics.